WASHINGTON (Reuters) - Housing starts touched a 1-1/2-year high in April, but a drop in building permits to a six-month low suggested the housing market recovery may struggle to gain momentum without more government aid.
Tuesday's data suggested the U.S. economic recovery was progressing well into the second quarter, but worries persist that the debt crisis in Europe could stunt growth in the months ahead as governments there tighten their budgets.
Housing starts rose 5.8 percent to an annual rate of 672,000 units in April, the Commerce Department said, likely lifted by the looming expiry of a federal tax credit for home buyers. Groundbreaking had increased 5 percent in March.
Financial markets had expected housing starts to rise to 650,000 units last month. Compared with April last year, starts were up 40.9 percent, the largest increase since March 1994.
"The increase in demand prompted by the tax credit has lifted construction, but the expiration of the credit on April 30 has made homebuilders wary about continuing to add new homes during the summer," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
Building permits, which give a sense of future home construction, dropped 11.5 percent to a 606,000-unit pace last month, the lowest level since October 2009. Markets had expected a 680,000-unit rate in April.
Separately, prices received by U.S. farms, factories and refineries slipped 0.1 percent in April after a 0.7 percent rise in March, the Labor Department said. Markets had expected producer prices to gain 0.1 percent.
With the housing market still shaky, inflation subdued and worries about Europe hanging over markets, analysts have increasingly come to the view that the Federal Reserve would extend its ultra low interest rate policy into next year.
U.S. stock indexes opened higher <.N>, cheered by solid earnings from home-improvement chain Home Depot
However, Wal-Mart said high unemployment and fragile household finances remained a constraint to spending.
SINGLE-FAMILY STARTS UP
Housing starts in April were lifted by a 10.2 percent rise in groundbreaking for single-family homes to a rate of 593,000 units. This followed a 2.1 percent gain in March.
Starts in the volatile multifamily segment tumbled 18.6 percent to a 79,000-unit annual pace, partially reversing the prior month's 24.4 percent surge.
The rise in single-family starts likely reflected a rush by prospective homeowners to sign contracts by the end of the month in order to qualify for the tax credit.
Despite the drop in permits after two straight months of gains, analysts are cautiously optimistic that home construction will hold up and believe a combination of low mortgage rates and an improving labor market will partially fill the void left by the end of the tax credit.
A National Association of Home Builders survey on Monday showed home-builder sentiment rose to its highest level in more than 2-1/2 years in May on the strengthening economic recovery.
"Housing starts should continue to trend higher this year, meaning residential construction will contribute to economic growth," said Sal Guatieri, an economist at BMO Capital Markets Economics in Toronto.
"However, until the foreclosure wave ebbs and the overhang of unsold existing homes abates, the recovery in homebuilding will be subdued."
Investment in new home construction contracted in the first quarter after two straight quarters of growth. A flood of foreclosed properties is hampering the housing sector's recovery from a three-year slump.
Last month, building completions increased 19.2 percent to 769,000 units, while the inventory of total houses under construction fell 2 percent to a record low 482,000 units.
The total number of units authorized but not yet started dropped 5 percent.
(Reporting by Lucia Mutikani and Pedro Nicolaci da Costa; Editing by Neil Stempleman and Dan Grebler)